Wachovia Goes to Citigroup with FDIC Assistance

Wachovia becomes the latest giant to fall into an apparent three bank consolidation. Wachovia was acquired this morning by Citigroup. The FDIC assisted agreeing to absorb losses above $42 billion and would get $12 billion in preferred stock and warrants from Citigroup.

The FDIC was clear to emphasize that Wachovia did not fail, but was acquired by Citigroup and FDIC merely assisted the transaction.

Bank of America, JP Morgan, and Citigroup have now concentrated 30% of the financial industries total deposits. These three large consolidations of banking power will also dominate lending, financial services, and product pricing--potentially forcing regional and mid-size banks to seek their own acquirors for survival.

Wachovia's search for a suitor seems to have intensified following Washington Mutual's failure and the weekend marathon Congressional negotiations over the $700 billion bailout. Wachovia reportedly was in discussions with Citigroup, Wells Fargo, and Banco Snatander (Spain).

Both Citigroup and Wells Fargo seemed to be nervous by the loan portfolio filled with risky mortgages, most notably pay-option ARMs brought in with the acquisition of Golden West Financial. This 2006 acquisiton of Golden West, a pay-option mortgage specialty lender, still haunted Wachovia's portfolios two years later.

This deal is expected to boost Citigroup's retail banking presence, but still leave it far behind Bank of America and JP Morgan.